Health construction falls

Photo by Jeff HageMajor health care projects like the new Helen DeVos Children’s Hospital have dried up in today’s economy. They had the need, and they had the money to do it.

So despite the souring economy, directors at Lakeland HealthCare in St. Joseph never hesitated when deciding a year ago to proceed with developing a new $13.5 million cancer center.

“It’s the last piece of what we really, really need for our Lakeland system,” said Bill Johnson, the former longtime chairman of the Lakeland HealthCare board of directors who retired last December. “Why wait if it’s something that needs to be done for the community, the system, and we have the money?”

Lakeland HealthCare hopes to break ground next spring on the cancer center, which is presently one of the largest health care projects in West Michigan at a time when construction activity is a fraction of the recent past.

The economy, tight capital markets and a massive facility buildup that was beginning to ebb anyway has the number of capital projects in health care far below that of just a year ago.

The number of certificate-of-need applications filed with the Michigan Department of Community Health is down more than 40 percent through September, compared with the same period in 2008. The year-to-date collective cost of the clinical and capital projects is about one-fifth of a year ago, at $374.1 million.

Absent from the list of CON applications, approved projects and letters of intent filed with the state are the high-profile, big-ticket capital projects that highlighted health care construction for many years in West Michigan and spurred spinoff developments such as nearby medical office buildings.

The CON activity reports these days feature mostly projects to replace or upgrade medical equipment or launch clinical services. There are a number of renovations and proposals as well for new nursing homes, including North Ottawa Community Health System’s 125-bed, $17.0 million North Ottawa Care Center South in Grand Haven Township that is likely a late 2010 or a 2011 project.

There’s also sporadic small projects such as Holland Hospital’s $10 million outpatient center in Zeeland and the Spectrum Health Medical Group’s 13,000-square-foot medical office building in Sparta, in northern Kent County.

“The days of the $150 million big projects are pretty much gone. It’ll come back, but right now there’s not a lot of interest in the big projects,” said Lody Zwarensteyn, president of the Alliance for Health in Grand Rapids, which reviews local CON applications. “I just don’t see lots of projects out there.”

Nationally, private health care construction is down 3.2 percent through August, according to the U.S. Department of Commerce’s monthly construction report.

Zwarensteyn attributes the decline in health care projects largely to the economy and tight capital, which has hit the entire construction industry. There’s also the two-decade “building boom” that had to taper off eventually — and had plenty of reason to do so in the past year with economic conditions.

“We’ve been on a health care boom for 20 years. You have to stop and catch your breath sometime, and this is as good of a time as any,” Zwarensteyn said.

Adding to the slowdown is the present reform push in Washington, D.C. — and any potential cost-containment measures the industry may face — that has created uncertainty among health care providers about their financial future.

“It makes sense for people to say, ‘Well, let’s hold on a little bit.’ They don’t know,” Zwarensteyn said. “Anybody who goes out on a limb may regret it.”

Throw all of those factors together, and the result is a down market.

The providers that are still investing have redirected capital spending away from large brick-and-mortar projects, he said. Providers now are investing more in internal initiatives to drive improved operating performance and efficiencies — especially if they have recently completed a major capital building project, Zwarensteyn said.

Providers that are still planning brick-and-mortar projects can expect contractors “to beat a path to their door.”

That’s already been seen in St. Joseph, where Lakeland HealthCare’s Mike Kastner is taking inquiries “from people I’ve never heard from before” who want to bid on the cancer-center project.

“Lots of people are interested,” Kastner said. “They’re hungry.

“It’s far more than we would like and almost far more than we can handle.”

Lakeland, which is prequalifying bidders, is even receiving a “fair number” of inquiries from firms “who are fishing and probably can’t handle the work,” said Kastner, director of building services and construction management, who expects bids to come in below market costs.

Lakeland HealthCare plans to hire a construction manager soon, bid out the project early next year and start construction in early spring, Kastner said. Occupancy is targeted for mid-2011.

Contact Mark Sanchez at marks@mbusinessreview.com, or follow him on Twitter @masanche.